Dodd-Frank Wrong on CU Executive Compensation Caps

First regulators have graduated from assessing premiums on credit unions to curbing credit union executives' compensation packages. The NCUA and other financial services regulators are required under the Dodd-Frank legislation to curb executive compensation packages that could create a conflict of interest with regard to the long-term safety and soundness of a financial institution.

The goal of the regulation absolutely makes sense. But this is the job of the boards of directors and not the federal regulators, particularly as it pertains to credit unions. The unpaid board’s entire purpose is to ensure long-term viability of the credit union so it can continue serving its members. Legislating this is bad public policy and represents further infringement of the government into free-market enterprise.

The regulation also attacks a symptom that took place by some bad actors rather than the root of the problem. Many things went wrong causing the current economic crisis, including lack of oversight of unregulated entities like mortgage brokers and the conflict of interest at the ratings agencies. And, some were outright breaking the laws and regulations already in place. Police officers don't install breathalizers in all vehicles just because some drivers choose to drink and drive. Conversely, look how well Prohibition went in the late 19th and early 20th Centuries!

Credit unions are already hamstrung in competing with banks on compensation packages because they are not-for-profit cooperatives. There’s also no documentation of credit unions getting into trouble with this. Yet the asset-size threshold for credit unions ensnared in this regulation is much lower for credit unions than for banks. Banks threshold for compliance with the most stringent part of the regulation is institutions over $50 billion while credit unions’ threshold is $10 billion. The discrepancy further serves to hinder credit unions in getting the caliber executives they want and their members deserve.

And take a look at the major credit union failures due to overly risky investments in the last few years: Norlarco, Cal State 9 and Sterlent CU failures-none of them were very large! The asset size of the institution has nothing to do with it.

Further under the proposal, credit unions over $1 billion could not employ compensation programs that could lead to a material loss for the credit union and would have to document its compliance procedures. That is all code for greater regulatory compliance burden.

True, compensation isn’t everything when it comes to job hunting but it certainly counts for a lot. The federal banking regulators made this case when the Financial Institutions Reform, Recovery and Enforcement Act became law. The FIRREA agencies, including the NCUA, escaped the standard federal government pay-grade system in part because they said they couldn’t attract the necessary talent otherwise; the best financial minds would be scooped up by the institutions themselves.

It is also true that credit unions have not had a history of lavish pay packages, but then again, federal credit unions have never been required to disclose their executives’ compensation. Disclosure could very well be the next step if regulators go down this path of intervening in your business decisions.